How to Negotiate a Solid Contract

November 15, 2016 Asset Protection, Business planning, Law, Small Business Comments Off on How to Negotiate a Solid Contract

Lets face it, we all have to deal with contracts, many of us on a daily basis, and it is the law of contracts which forms the very foundation for our civil and commercial society.  The main purpose of a contract is to memorialize and confirm the intentions and future performance of the parties to the contract, and our society would be fraught with chaos were it not for laws that bind parties to their contractual agreements.

In our practice, we see a lot of bad deals and lost investments that result from the failure to have the deal memorialized in a solid written agreement, or that the agreement that was signed did not have sufficient provisions to protect the party’s interests.  While it is true that oral agreements can be binding, the problem is how will you prove in court what the terms of the oral agreement were if the other side fails to perform?  If and when a dispute does arise from an oral agreement, be assured that the opposing party will likely have a different version of what was said, or at least their recollection will be foggy.  For that reason, we will always recommend that your deal or understanding should be confirmed in a comprehensive, written agreement.

While no article can address all of the issues that could arise in a given transaction, and certain types of transactions will call for varying type of contractual provisions, here are a few tips to help ensure that your contracts will adequately protect your interests in any given transaction.

  1. Make sure the contract addresses all of your expectations for the transaction. The whole reason for having contracts is to confirm who will do what, when, where, and how.   We have seen our share of overly simplistic agreements that the parties “thought” were adequate, but failed to contain sufficient specificity as to all of the expectations of the parties.  For example, I had a case where the parties signed a written agreement that they would start a business and be 50-50 owners.   Nothing else was mentioned regarding who would do what, who was responsible for what, and what would happen to the business if they split or disagreed.  The subsequent result was years of litigation and tens of thousands of dollars in legal fees even though technically they did have a written contract.   A contract should be very specific and detailed as to each and every expectation you have of the other side.  Anything you expect the other side to do, not do, or any rights, protections or contingencies you want to preserve should be confirmed in detail in the contract.   Don’t assume that if the other side told you something verbally, in an email or text, that it necessary be enforced.  If a particular issue, term, or detail has any importance to you, put it in the final written agreement.
  2. Make sure terms are objectively clear and comprehensive.  Terms in a contract should be objectively clear and understandable.  I often see agreements that contain references that would only be understood by those in the industry, or worse, only by those individuals who were parties to the agreement.  Keep in mind that if the other party defaults and you need to have the agreement enforced, it will likely be a lawyer, judge, or jury that decides your case.  Therefore, the terms in your contract should be written as if it were to be interpreted by someone who has no experience or knowledge with your particular transaction, since realistically they will likely be the ones to interpret or enforce the agreement in court.    Many contracts written by attorneys will begin with a summary of the facts and circumstances giving rise to the agreement itself which helps provide context to third parties for the provisions that follow.
  3. Make sure you properly address foreseeable contingencies or breakdowns. Similar to No. 1, many laypersons inexperienced in negotiating agreements frequently fail to consider all the possible ways their agreement could fail.  One of the most important aspects of a solid contract is to fully address all the “what ifs” in a given transaction.  Indeed one of the best ways to protect your rights in a transaction is to fully address each and every way the transaction could go wrong (i.e. events of breach or default), and what will be the rights of the parties if or when those events occur (i.e. remedies or enforcement upon default).  Some may feel they are disrespecting or offending the other side by bringing up these concerns, but the best time to address these types of issues is BEFORE they occur.    Similarly, many inexperienced with contracts or the process that is involved to enforce a contract in court fail to even consider the possibility that a dispute could arise, and that they may end up having to pay attorneys’ and other fees to enforce their rights.  The general rule in America is that unless you specifically provide for attorney’s fees in the contract, each party will pay their own attorney’s fees if court intervention becomes necessary.  Therefore, I generally recommend dispute resolution provisions and attorney’s fees clauses in every contract.

These tips are not intended to be a substitute for consulting with your attorney or other professionals who have experience in your particular type of transactions, and can advise you on terms and issues that could likely arise that should be included in the contract.   Given the proliferation of contracts in today’s society, it would be unrealistic to expect that you would apply this level of scrutiny to every contract you see.  However, if you have important rights at stake in a given transaction, these tips along with consulting your attorney will help ensure that, for THIS contract, your interests are adequately protected in the deal.

About the author

Lee is an attorney at the California office of Kyler Kohler Ostermiller & Sorensen located in Irvine, California. Lee focuses his practice on real estate and business transactional/ litigation, debtor/creditor law, IRS negotiations, business planning, asset protection and estate planning. Lee’s practice includes advising clients on the formation of business entities, partnerships, and general tax planning relating to business entity formations. Lee also provides advice on structuring real estate investment deals and asset protection issues arising from investments in real estate. He also regularly advises and assists clients in IRS matters including audits, collections, installment agreements and offers in compromise.